Volatility Trading Becomes More Accessible with Vix's New Formulation

Strategic Insights -

Trading volatility has long been a delicate exercise, with the Chicago Board Options Exchange's (CBOE) Vix, a widely followed indicator of market risk, serving as a gauge of market sentiment. However, the Vix's limitations, such as its reliance on the less widely followed S&P 100 index and complex calculation method, have made it challenging for investors to trade volatility as a separate asset class. Recent changes to the Vix, including its reformation based on the S&P 500 index and a simpler calculation method, have made volatility trading more accessible to investors.

Key Takeaways:

  • The new Vix formulation is now based on the S&P 500 index, a more widely followed stock market index, providing a more accurate gauge of market risk.
  • The Vix future, launched in Chicago, has proven popular among European institutions due to its simplicity and accessibility.
  • Goldman Sachs has introduced certificates based on the Vix, listed on the London Stock Exchange, making it more widely available to investors.
  • The Vix future captures changes in expectations for the path of implied volatility, not the gap between implied and realised volatility, which may be useful for long-short hedge funds and value investors seeking to hedge against rising volatility.
  • The Vix's new formulation has made it easier for investors to trade volatility as a separate asset class, providing a new tool for risk management and investing.

Statistics:

  • Implied volatility, currently at 19%, is expected to dip slightly next month before rising above 20% (Source: Goldman Sachs).
  • The Vix future is popular among European institutions due to its simplicity and accessibility (Source: CBOE).
  • The new Vix formulation is based on the S&P 500 index, a more widely followed stock market index (Source: S&P Dow Jones Indices).
  • Long-short hedge funds and value investors can benefit from the Vix future's ability to capture changes in expectations for the path of implied volatility (Source: Goldman Sachs).

Sources:

  • Goldman Sachs
  • Chicago Board Options Exchange (CBOE)
  • S&P Dow Jones Indices
  • London Stock Exchange